Do Noncompete Agreements Make Noncompetitive Labor Markets?

Noncompete Agreements (NCAs) contractually limit a worker’s ability to accept a new job with a competitor of his or her current employer. By restricting workers’ mobility across employers, current employers may be more willing to invest in training or to impart trade secrets without fear that their workers will transfer the benefits of those assets to competitors. Surprisingly, these agreements are frequently used in lower-paying occupations, in which the need to protect the value of training, trade secrets, or other transferable business interests—employers’ standard justification—is not credible. Starr et al. (2018) find that 12% of workers making less than $20,000 a year were bound by an NCA, and even fast food workers are required to sign them, leading some to question the rationale for NCAs.

Despite growing debate over these agreements, research into the effects of state-level policies that determine the extent to which they are legally enforceable has been limited. This is in part due to data limitations and because it has proven difficult to identify the mechanisms through which NCAs affect labor markets. Economists Matthew Johnson, Kurt Lavetti, and Michael Lipsitz will examine the extent to which laws governing the enforceability of NCAs affect workers’ earnings, mobility, and the overall functioning of labor markets. The project includes updating a dataset compiled by Hausman and Lavetti (2018) quantifying all changes in state-level noncompete agreement enforceability laws from 1991-2009.

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